Structured products make case for portfolio inclusion

Jonathan Boyd

26 February 2016

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Returns data published by Lowes Structured Investment Centre in the UK suggest that structured products have produced better returns against key benchmarks such as the FTSE 100 while reining in risk over the past half decade.

In its 2015 Structured Product Annual Performance Review, Lowes, which is part of Lowes Financial Management, a UK chartered financial planning firm, points to data from all structured product that matured in the UK market in 2015, but also at data of products that matured in the past five years.

According to the data, of the 424 products maturing in 2015, some 416 produced positive returns. Seven returned capital, and one lost capital for investors. The average annualised return, based on the investment start date through to maturity, came in at 6.8%.

Over five years, 1,619 products out of 1,875 that matured offered positive returns, averaging annualised returns of 6.36%.

(Source: Lowes)

Chris Taylor, head of Strategic Development at Lowes Structured Investment Centre, notes that the data and associated report are important “because there has never been this level of granular breakdown on behalf of investors and IFAs in the UK”.

The data also holds resonance across Europe, he adds, because of a couple of key factors.

Firstly, use of structured products is generally accepted as being “ahead” in markets such as Switzerland and Germany.

Secondly, there is a question over what impact regulatory changes in the area of retrocessions may have on the market. Taylor refers to the UK’s Retail Distribution Review (RDR) which introduced specific rules around commission payments between providers and intermediaries.

Removing commission has seen structured products’ fee structures built along more institutional lines, ie, without commission built in. The evidence in the five year data suggests that there have been improvements in performances, particularly in the bottom quartile. This may indicate better products have been coming to market, but could also indicate the impact of removal of commission from the terms.

Noting the returns data published, Taylor is keen to stress that investors should see that the performance figures are compared against total return figures for benchmarks such as the FTSE 100, which means where there is outperformance by structured products, they have beaten popular benchmark total returns including dividends.

That also needs to be put in context of what Taylor refers to as a “USP” of structured products: that they can provide a return without any growth necessary in an index. References to this ability is contained in Lowes’ Performance Review report (click here for a copy: SPR_LSIC_SP Perf Review ).

“If the index goes sideways, most passive and active funds will do similarly,” Taylor suggests.

“But structured products have shown themselves able to generate returns in sideways markets.”

(Source: Lowes)

The downside protection performance of structured products is another development seen in the data, the report suggests. Of some 347 UK products linked to the FTSE 100 all delivered returns when the index fell.

On the basis of the performances found through the research, Taylor suggests that there is room for more frequent updates on products, such as interim quarterly updates of related performance data.

The outlook for the sector is strong he suggests. The UK market shrank after the 2008-9 financial crisis, when distribution was curtailed, leaving it in the hands of IFAs. However, with data suggesting there has been improvements in product design, and that their availability is becoming aligned with better quality advice for investors, then there are expectations of growing supply of and demand for structured products.

Taylor adds that given the type of market conditions seen in so far in 2016, it is also arguable that structured products have a place in a balanced portfolio alongside active and passive funds.